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Edwards v. Demedis12/22/1997
The principal issue before us is whether the discovery rule, which determines when a cause of action accrues, requires that a formal notice of deficiency be issued by the Internal Revenue Service in order for a claim based on alleged negligent tax advice to accrue. We hold that it does not.
Facts
The four appellants, Francis Thelen, George Sourlis, George Antonas, and Nicholas DiGiacomo, are retired Baltimore County school teachers. Each was a member of the Maryland State Retirement System (Retirement System), and consequently, a percentage of their gross earnings was paid to the Retirement System during their working years. The contribution was not tax deductible. In 1990, the State closed the Retirement System to new employees and replaced it with the Pension System. The Pension System was non-contributory but provided a lower benefit at retirement and required longer service before eligibility for retirement. Members of the Retirement System were given an option to transfer to the Pension System. To encourage transfer, the State offered to refund all or part of each employees contribution to the Retirement System, depending on the facts of each case, plus interest.
In 1990, Pandelis Demedis, appellee, a financial planner and registered representative of Chubb Securities Corporation, also an appellee, presented an investment plan to teachers, including each appellant. The plan envisioned that each teacher would accept a transfer refund from the Retirement System and roll over the interest portion of the refund into an individual retirement account that would be managed by Demedis. Demedis and each appellant obtained a legal opinion from Edward L. Blanton, Jr., another appellee, an attorney, that the interest portion of the refund was eligible for a tax-free rollover. The legal opinions were issued between February and November, 1990. Each appellant transferred from the Retirement System to the Pension System and invested funds in individual retirement accounts managed by Demedis.
Sometime prior to January 1990, the State requested a revenue ruling from the Internal Revenue Service on the eligibility of the interest portion of the refund for tax-free treatment. The Internal Revenue Service issued a ruling on July 23, 1990, holding that the refund did not qualify for tax-free treatment. Thelen, Sourlis, and Antonas received notice of the Internal Revenue Service ruling in the summer of 1990.
Unlike the other appellants who had transferred their funds in early 1990, DiGiacomo did not transfer funds from the Retirement System to the Pension System until after the revenue ruling. In conjunction with that transfer, DiGiacomo was advised in November 1990 that the Internal Revenue Service had ruled that the refund could not be rolled into an individual retirement account and qualify for tax-free treatment.
In the fall of 1990, Thelen, Sourlis, and Antonas received one or more letters from state and federal legislators concerning the tax issue. The three appellants understood that the legislators had been contacted because of the revenue ruling and with regard to a possible effort to seek legislative change. One or more of the legislators advised appellants that they had received inaccurate advice regarding the tax consequences resulting from the transfer of funds.
On April 2, 1991, the executive director of the Maryland State Retirement Agency issued a memorandum directed to persons who had received a transfer refund in 1990. In that memorandum, the executive director stated that taxes could be imposed on transfer refunds and advised recipients to close individual retirement accounts and withdraw the transferred amounts prior to
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